The Truth About Gig Workers

California’s AB5 has been approved and the apocalypse is coming! Once again California is forcing companies to do things they were not willing to do on their own. In this case, the new rule provides three tests that must be passed to classify someone as an independent contractor.

(A): The worker is "free from the control and direction" of the company that hired them while they perform their work.

(B): The worker is performing work that falls "outside the hiring entity's usual course or type of business."

(C): The worker has their own independent business or trade beyond the job for which they were hired.

While this seems like a pure HR issue, it is a compensation issue. Paying employees costs more than paying contractors. It’s a fact. Companies are increasingly focused on more aggressive profit margins. The concept of “gig workers” help solve this issue by allowing companies to grow without paying things like minimum wage, overtime, benefits and other traditional components of total rewards. It has been estimated that the average Lyft and Uber employee will make about $3,600 more each year. This isn’t chump change, but it isn’t doubling anyone’s pay either.

This is a compensation issue because compensation because paying people is expensive. If you want to make more money just pay people less. By the same logic, if you want to make tons of money, just pay people nothing (and we know how that turned out.)

When the gig economy first became popular it was seen as a way for people to augment other income sources, or get paid to do jobs that would not otherwise get done. The people started working their gigs full-time and companies began slimming down the pay for these gigs. Pretty quickly taxi services started going out of business and people were complaining they no longer made enough to live in the cities they supported.

Who didn’t think this would blow up someday?

Like so many compensation-driven issues this could have been easily avoided. What if gig companies looked at their technology and business operations as the sole methods to improve efficiency and profits, rather than looking at humans to accomplish those goals? What if they had paid people (as gig workers) no less than they made in their prior work iteration? What if $3,600 for individual employees was just as important as the millions of dollars made by the early executives of these companies? What if they had shared equity more generously (as it was envisioned when it became popular decades ago?)

The opportunities to avoid this new rule were there. Companies will now spend millions fighting this new rule in court (millions they could have paid to workers.) They will spend millions of dollars reclassifying people, upgrading HRIS systems, changing payroll operations and so much more.

All of us in the compensation world should have seen this coming. We should have made a bigger effort educating executives and investors about how easy, and relatively inexpensive it would be to avoid this type of rule. I am sure there will be far more written about this in the coming months. Most of it will not discuss compensation specifically, but we will know the truth and know how to make sure it doesn’t happen again.

One note: This new law impacts ALL SORTS of workers. Janitors, Musicians, Truckdrivers, and more.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He is a leading expert on incentive plan and equity compensation issues and has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.

Comments

[E. James (Jim) Brennan]

Woulda-shouldas don't rule... people act in ways they believe are in their own best self-interests, regardless of the effect on others.

Economic mechanisms, ethical/religious systems, social structures, professional practices and government regulations all operate to hopefully block the worst excesses that occur. But people learn by mistakes. Nearly all laws are retroactive reactions to socially harmful behaviors.

Preventive measures are rarely effective, because no one accepts the need for sandbags until after the flood. Hindsight is 20-20 and all that stuff...

We regular writers here are Compensation Cassandras, charged with forecasting potential outcomes from early trends. Pointing out unintended consequences is an essential element of the Total Rewards trade.

Tough job, unpopular and unrewarded; but someone has to do it.

[Karen Kervick]

How is this CA law different from the Federal independent contractor classification? Sounds very similar to me, which means the employees should not have been classified as independent contractors in the first place.

[E. James (Jim) Brennan]

The IRS tests seem the same. Here is the final section of the standards tested in the Relationship section: "Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company."

Guess CA just wants its own staff making those determinations rather than Federal IRS Agents. Possible duplication of effort, unless CA will be stricter. They need money, so... not hard to guess...

[Karen Kervick]

I read that Uber still plans to classify their workers as independent contractors. If so, they might have an issue with CA and the IRS rule since their entire business is providing transportation. Seems like the primary indicator might be the key business activity aspect. Even if we hire someone to fulfill a role on a temporary basis, normally filled by someone else, I could use an independent contractor, if all other criteria were met, as long as that role is not providing a key business service of ours. Okay for operational roles then maybe, but not for sales roles if that is the business' primary activity.

[Dan Walter]

The new California law is stricter and far more prescriptive than the IRS classification process. The IRS process provides guidelines but allows for wiggle room based on various factors. The CAS rule says an individual is an employee unless.
(A): The worker is "free from the control and direction" of the company that hired them while they perform their work.

(B): The worker is performing work that falls "outside the hiring entity's usual course or type of business."

(C): The worker has their own independent business or trade beyond the job for which they were hired.

AB5 is also more expansive, it applies to California’s Wage Orders as well as the Labor Code and Unemployment Insurance Code. This means liabilities for mistakes may be much higher.

There are many jobs excluded from the bill. These include (from the current bill as written0
A person or organization who is licensed by the Department of Insurance pursuant to Chapter 5 (commencing with Section 1621), Chapter 6 (commencing with Section 1760), or Chapter 8 (commencing with Section 1831) of Part 2 of Division 1 of the Insurance Code.
(2) A physician and surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the State of California pursuant to Division 2 (commencing with Section 500) of the Business and Professions Code, performing professional or medical services provided to or by a health care entity, including an entity organized as a sole proprietorship, partnership, or professional corporation as defined in Section 13401 of the Corporations Code. Nothing in this subdivision shall apply to the employment settings currently or potentially governed by collective bargaining agreements for the licensees identified in this paragraph.
(3) An individual who holds an active license from the State of California and is practicing one of the following recognized professions: lawyer, architect, engineer, private investigator, or accountant.
(4) A securities broker-dealer or investment adviser or their agents and representatives that are registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority or licensed by the State of California under Chapter 2 (commencing with Section 25210) or Chapter 3 (commencing with Section 25230) of Division 1 of Part 3 of Title 4 of the Corporations Code.
(5) A direct sales salesperson as described in Section 650 of the Unemployment Insurance Code, so long as the conditions for exclusion from employment under that section are met.
(6) A commercial fisherman working on an American vessel as defined in subparagraph (A) below.
(A) For the purposes of this paragraph:
(i) “American vessel” has the same meaning as defined in Section 125.5 of the Unemployment Insurance Code.
(ii) “Commercial fisherman” means a person who has a valid, unrevoked commercial fishing license issued pursuant to Article 3 (commencing with Section 7850) of Chapter 1 of Part 3 of Division 6 of the Fish and Game Code.
(iii) “Working on an American vessel” means the taking or the attempt to take fish, shellfish, or other fishery resources of the state by any means, and includes each individual aboard an American vessel operated for fishing purposes who participates directly or indirectly in the taking of these raw fishery products, including maintaining the vessel or equipment used aboard the vessel. However, “working on an American vessel” does not apply to anyone aboard a licensed commercial fishing vessel as a visitor or guest who does not directly or indirectly participate in the taking.
(B) For the purposes of this paragraph, a commercial fisherman working on an American vessel is eligible for unemployment insurance benefits if they meet the definition of “employment” in Section 609 of the Unemployment Insurance Code and are otherwise eligible for those benefits pursuant to the provisions of the Unemployment Insurance Code.

[EJames Brennan]

Thought Uber was claiming they are a "technology" firm, probably "just a lead-forwarding service to vendors who meet their specs" like a union hiring hall that denies being "an employment agency."

Not working in CA any more, thank goodness, so I don't know for sure. I am quite confident that they will jump all over any suspected offender now. With their duplicate law, if they beat the IRS to the punch and charge the employer first, they get the State-specified fines and penalties. They need the dough and should be aggressive.

Is there double jeopardy, though? If CA gigs you, are you still vulnerable to an identical IRS assessment, too? Maybe they will share victims, as they did with OT violators and IRC 4958 offenders.

Tough time to be a CA employer... fer shure...